Currency volatility, also known as foreign exchange or FX volatility, is the unpredictable movement of exchange rates in the global foreign exchange market.
Currency volatility and international businesses
This volatility can lead to large losses (or gains) in the foreign exchange market. It is the principal cause of foreign currency risk.
FX volatility is one of the greatest credit risks to the corporate sector, and one that must be managed effectively in order to protect a company’s bottom line.
Volatility is produced in a currency due to a range of possible factors including inflation levels, interest rates, tourism, geopolitical stability, import and export levels, and monetary policy, among other factors.
Real instances of currency volatility:
In January 2015 the Swiss franc shock, which saw the Swiss National Bank abandon the peg that kept the franc locked to the euro at a fixed rate, sent currency markets across the world into a volatility spin. The euro dropped in value by over 30% against the franc.
In 2014 the Russian rouble fell by around 50% in value against theU.S. dollar as the price of oil nosedived – Russia is a commodity-driven economy reliant on gas and oil exports – and economic sanctions on the country bit hard.
2014 saw Apple Inc. and Google both post huge losses as a result of aggressive volatility in the currency markets. It is essential for companies to protect themselves, their bottom line and their profit margins by putting in place a robust FX strategy.
Do you want to know how to protect your margins from currency volatility? View Dynamic Hedging.